How much is too much to increase rent?

Question

Hello all, I just closed on my first multi family property. The multi came with tenants of 10+ years. The previous owner only increased rent by $25 once in those 10+ years. Right now the tenants pay $750/ month plus their own utilities... minus water which the owner pays (even though the units have separate water meters). I would like to have them start paying for their own water as well as raise the rent. Comps in the area are going for $1000- $1500/ month. They are good tenants and I don't want to screw them with a huge increase but also for what I paid, I need more. How do I go about relaying this to them in a way in which they can understand.. also how much is too much to raise the rent?

Mike D'Arrigo · Answer

@Max Pryor it is going to take a lot to get this property stabilized and performing to market level. You need to get tenants paying water and you need to get the rents to market rate. The tenants got a heck of a great deal for 10 years. Although it's not pleasant to raise peoples rents that much, you wouldn't be screwing them. They've been paying 25% to 50% below market rent and no one else would allow that. They are most likely going to leave and you will have to get the replace the tenants. I suspect you will have to put a lot of money in to deferred maintenance when they leave which is another reason that you need to get these units performing,

Bill B. · Answer

I would explain to the tenants what the current market rate is and show them how you came up with that number. I would then offer then 1/2 way between current and market rent for at least a year. That way they know they are still getting a deal and you get a lot closer to market rate with no turnover and no vacancy which might very well eat up that $200/mo for a year or two.

This year has been insane for rents. I recently showed a 6 year tenant why I was raising their rent $500/mo because I was sure I could get much more from a new tenant. A tenant I raised rent $150/mo starting November 1st and switching to MTM had only one question. Does this mean you plan to kick me out or raise rents again in less than a year? I said not if you’re paying on time and she said no problem, sounds fair.

Justin Spears · Answer

@Max Pryor check out the lazy mans episode on bigger pockets. Episode 448. Dion explains how to do that very well.

Patrick M. · Answer

@Max Pryor "but also for wat I paid, I need more"

This translates to - I overpaid for the property. Don't worry there is a lot of that going around. But it does give me some pause on your analysis.

1. When you are talking about a $500 market swing in comps in such a modestly priced range - It leads me to believe that you are not correctly assessing both your units market value and also its proper comps.

2. You hold in your hands the first rent increase- their water bills. How much are they and when will you be able to present them with new lease terms. Also, will they run with the land or the tenant and what does your market do with water. Mine is universally paid by the landlord.

3. Going forward you should have a set number in mind, that way you can inform any potential new tenants of what they can expect when you are vetting them. "You should expect a 3% increase in rent yearly unless inflation dictates a higher increase is warranted to keep up with costs."

Personally I am on board with @Bjorn Ahlblad. My units were under market when I bought, cash flowing nicely- but the place was a turd hole. Vacate, renovate- increase. I could say they were under market- but frankly I would not be happy renting them nor the people they would draw.

Also, get used to the idea that no one is going to "understand" why you have to increase rents, especially the tenants AND especially if you are going to require they pay water. Your costs have just gone down in their eyes. No one, not anybody, is going to understand, welcome to the club. Your job is to make a profit so that when the water heater goes out you can fix it, and the toilet stops working, and the fixtures start leaking and the snow.... The more you make, the better a landlord you can be.

Good luck

Rodney Lorenzo · Answer

@Max Pryor I think you have plenty of good advice on here. $25 in 10 years is something for those tenants to celebrate. Not all landlords are this generous. Some only care about where to park their cash and have no problems letting a tenant pay 1/4 to 1/2 of market rent. Personally, as a buyer, this has caused me to be disqualified by lenders because they use the current rent roll. You have an advantage that you have separate water meters and don't have to invest for these modifications. I think a 5% increase is fair, however, I like @Bill Brandt idea better - meet them half way between current and market. Any time a tenant leaves, there's an opportunity to increase cash flow. A 3% yearly increase should be in order

JD Martin · Answer

For sure start with the water bills. That's easy. If their leases is up, notify them that effective X date the water meters will be finaled out of your name and they will need to sign up for water on or before that date (assuming your utility reads the meters and bills directly). If these are sub-meters and you have to pay the master meter rate to the utility, then effective X date the meters will be read and billed directly to you at the rate mirroring that of the utility company.

Just doing this will probably have a good effect on your bottom line, as people who don't pay for their own utilities tend to waste them.

Beyond that, you need to be sure your comps are reasonable for what they would be getting if they moved, then start doing some gradual raises.

Dave E. · Answer

@Max Pryor check your local laws etc. Some areas have limits on how much you can increase the rent each year. Also check the current leases (if there are any). Sometimes the lease will spell out the increases.

Just have to be up front and stand your ground. If you let one of them go without an increase, the others will certainly hear about it. Just be fair and transparent and stick to it.

Wale Lawal · Answer

You won't get the full monthly rate and water bill, but you get closer to your goal.  Be honest and explain all the work that goes into making the units perform up to standers. Explain your goals for future tenants, and make them realize that they are still receiving some kind of discount. Good luck!

Bjorn Ahlblad · Answer

@Max Pryor my wife and I bought a twelve unit a four years ago that was producing gross rent of 72k/yr. We raised existing tenants lightly 5%. Whenever there was turnover we painted and redid flooring and appliances as needed presenting really nice units at market rent. There are still 2 tenants that are under market but the building is now grossing 120K/yr and there is room for some more-we have not spent a lot of money to increase that revenue by 48K/yr. Pay close attention to your property what is happening around you.

We pretty much quit buying more buildings because CF is compressed with crazy west coast prices and we instead focused on maximizing the return on this 12 unit. We have duplexes too but the profits have not been the same. Yes we have raised rents there too but rehabs have been more costly.

Max Pryor · Answer

Thanks @Mike D'Arrigo & @Bill Brandt for your replies. Different angles really help make a single decision. It’s great having experienced and knowledgeable investors to help me through. Thank you both

How much is too much to increase rent?

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